Beardstown ladies took us for mediocre ride but sold 732,000 books

Staying Ahead

I KEEP waiting to hear which charity the Beardstown Ladies will designate to receive their ill-gotten gains.

The ladies belong to that famous small-town investment club, whose elderly members claimed an average annual investment return of 23.4 percent, from 1984 to 1993. Their performance, they said, was double that of the stock market as a whole, as measured by Standard & Poor's 500-stock average.

Based on those claims, they've sold 732,000 copies so far of "The Beardstown Ladies Common-Sense Investment Guide" (subtitled, "How We Beat the Stock Market -- and How You Can, Too"). The cover shows 16 happy and apparently wealthy ladies, each with a fan of greenbacks in her hand.

They're almost certainly wealthy now. Three additional Beardstown financial books have sold 415,000 copies, according to their publisher, Hyperion Press, a division of Disney Publishing. A new book, on stock picking, just shipped 130,000 copies. You can see the ladies on video ("Cookin' Up Profits"). An estate-planning book is due next year. They're in steady demand for personal appearances.

There's just one problem. Their market-beating claim was wrong.

Over that 10-year period, the ladies actually earned a mediocre 9.1 percent annually, according to a Price Waterhouse audit. Meanwhile, the S&P 500 average was rising a fat 14.6 percent.

Price Waterhouse partner Karen Vincent, who did the audit, says she wasn't asked to check what the ladies would have earned if they'd hypothetically put their money into the S&P 500, rather than into the stocks they picked.

So the S&P comparison isn't exact. No matter how you count, however, the ladies missed the market average by a mile.

"If I had put out such misleading figures, the Securities and Exchange Commission would be all over me," said one bemused mutual-fund manager. "I could have gone to jail."

The ladies say it was an innocent mistake. Treasurer Betty Sinnock, a former trust officer, made a computer error when she figured the returns.

For them, a super lucky error. America drew the club into its national fantasy of unearned wealth. Here was a group of friendly, small-town, churchgoing ladies from the Middle West. If they learned how to beat the market, book buyers thought, anybody could.

In truth, it's hard even for professionals to beat the market year after year, let alone a start-up neighborhood group. But it's not surprising that the ladies -- and many investors like them -- might imagine they've had superior returns.

Amateur stock-pickers rarely track investments the way the professionals do -- by subtracting losers from winners, adjusting for how long the money was invested and figuring compound average returns. We don't really know how well (or poorly) we've performed, compared with the market as a whole.

By forming an investment club, under the auspices of the National Association of Investment Companies (NAIC) in Royal Oak, Mich., the ladies created a pleasant environment for learning about investments.

But you learn much less if you don't have a clue as to how well your stocks have really done.

NAIC software, designed to track the value of each club member's share, provides a rough performance number. But it's not exact -- and I wonder how many members know that. There's no adjustment for how long your money was invested, says NAIC President Kenneth Janke.

To get a better picture, clubs should submit a model portfolio to NAIC, Janke says. A different computer program will show that portfolio's actual returns, compared with the market as a whole.

The ladies never did this, hence never learned how mediocre their stock picking was. That mistake hasn't stopped their speechmaking. They're pointing now to their one big year (up 54.4 percent in 1991). But that was luck. Most of their other years were grim.

This story was pried open by Shane Tritsch, a reporter for Chicago magazine. From scanty evidence in the book, he concluded that their returns were overstated by roughly half. The actual result was even worse than he thought.

Hyperion will ship disclaimers to the bookstores. Printings will be corrected. The cover will lose that phrase about beating the market. The ladies say they're "terribly sorry for the error."

But let's face it: They wouldn't be famous if they hadn't been confused about their investment returns. "How We Picked Under-performing Stocks -- and How You Can, Too," isn't much of a sell.